Oh please, Bitcoin is NOT deflationary.

[Imahara]

Time and time people say bitcoin is 'deflationary'. That is wrong.

As if we already know that bitcoin's price relative to others assets will always be rising. Ridiculous. An expectation like that would cause people to buy bitcoin, cause its price to rise, right up to the point where the expectation is GONE. Period!

The misunderstanding comes from the fact that bitcoins cannot be created endlessly, unlike government issued currency. But it is the quantity that is fixed, not the price.

And why would occasional deflation be bad? Deflation hurts an economy only if inflation has had a chance to embed itself in economic contracts, Central Banks have caused this to happen by steering the growth of the money supply by looking at the inflation rate. An unexpected deflation would distort prices because of this Central Bank policy. Suddenly expensive labour contracts cause companies to lose money.

But in a bitcoin economy it is unlikely that people will lock in Bitcoin prices for long term contracts. There is no Central Bank to aim at a specific constant price increase. It's just supply and demand, which will keep bitcoin moving around some level. Not a problem at all, plenty real indexes to tie your contract price to if you really want to. And otherwise, there will be parties willing to hedge your risk with futures, options etc, at fair costs.

So STOP saying Bitcoin is deflationary. It is not.



EDIT: From a later post:

Just because there is a fixed supply of bitcoin, that does not mean prices will have to keep going down.

No price can consistently and predictably move more than 'the' risk free rate of return, simply because that would provide a risk free profit that the market would adjust for. Bitcoin worth more in the future? I buy now and keep buying until the expectation of a further price rise is gone. Lowering today's prices of goods in terms of bitcoin and raising future ones in the process. The coins I bought I will spend tomorrow.

The Fisher equation isn't so bad after all in showing what is happening. MV=PQ, the supply of Money times its Velocity equals the Price times the Quantity of goods. We know M is fixed and Q is growing constantly. When we wrongly assume V to be a constant (as is often instructed) then the Price level would have to accommodate for the increase in quantity Q by going down. Deflation as some say.

But as I have shown, P can't move predictably without affecting people's decisions on postponing to spend. A predictable price drop tomorrow will cause less coins chasing after goods today (we are hoarding) and more coins thrown around tomorrow (we will spend). What happens is that today's Price level will lower and tomorrows Price level will go up, equalizing the price difference to within limits of the risk free rate where it can persist.

This effect of hoarding is exactly what Velocity of money means to say. Because of the fixed supply of coins and the growing economy, we can expect Bitcoins to be hoarded. The velocity of bitcoin is lower now than it will be tomorrow. The price level on the other hand will be stable within bounds. (Not keeping into account other demand fluctuations)

The problem I have with the Fisher equation is that it seems to describe money using independent variables. As you can see P and V are linked, so you cannot determine the change in a one of these two variables when you know the change in the other. There will be second order effects. In this case, a change in P will lead to a change in V now, which in return will reduce the change in P...

[deisik]

You have forgotten to write whether AnonyMint is allowed to post in this topic. Though you probably don't yet know who is this personality...

[Littleshop]

Time and time people say bitcoin is 'deflationary'. That is wrong.

........


So STOP saying Bitcoin is deflationary. It is not.

+1.  In fact Bitcoin is a little inflationary as new coins are constantly being printed.  We are just so used to massive printing on the government scale that the slow printing rate of Bitcoin is looked at by some as deflationary when in reality it is just very low inflation.

[deisik]

Time and time people say bitcoin is 'deflationary'. That is wrong.

As if we already know that bitcoin's price relative to others assets will always be rising. Ridiculous. An expectation like that would cause people to buy bitcoin, cause its price to rise, right up to the point where the expectation is GONE. Period!

The misunderstanding comes from the fact that bitcoins cannot be created endlessly, unlike government issued currency. But it is the quantity that is fixed, not the price.

In an expanding economy the same amount of bitcoins would be continually distributed on an ever increasing quantity of goods, which would mean sustained deflation. It is not that difficult to understand really...

[Imahara]

It can't be either deflationary or inflationary by definition. In both cases you are making a price prediction with which you could make a risk free profit if it held true. Whether you have to go long or short, you would in the end trade away the expectation.

[Imahara]

In an expanding economy the same amount of bitcoins would be continually distributed on an ever increasing quantity of goods, which would mean sustained deflation. It is not that difficult to understand really...

Wrong, wrong, wrong. You are dividing the value of the economy by the number of bitcoins. You should divide the value of the economy by the number of bitcoins TIMES their price. The price will incorporate the expected future growth of the underlying economy. Why do you think there is $15 billion worth of bitcoin now with only little trade. We are taking the future into account.

Bitcoin is not deflationary. Bitcoin is not inflationary. There is no free lunch.

[deisik]

In an expanding economy the same amount of bitcoins would be continually distributed on an ever increasing quantity of goods, which would mean sustained deflation. It is not that difficult to understand really...

Wrong, wrong, wrong. You are dividing the value of the economy by the number of bitcoins. You should divide the value of the economy by the number of bitcoins TIMES their price.

What do you mean by "their price" here? Price denominated in what?

[deisik]

It can't be either deflationary or inflationary by definition. In both cases you are making a price prediction with which you could make a risk free profit if it held true. Whether you have to go long or short, you would in the end trade away the expectation.

Yes, it depends on whether economy is expanding or shrinking. In the first case it will be deflationary, in the second inflationary, provided all other things being constant...

[Martijnvdc]

In an expanding economy the same amount of bitcoins would be continually distributed on an ever increasing quantity of goods, which would mean sustained deflation. It is not that difficult to understand really...

Wrong, wrong, wrong. You are dividing the value of the economy by the number of bitcoins. You should divide the value of the economy by the number of bitcoins TIMES their price. The price will incorporate the expected future growth of the underlying economy. Why do you think there is $15 billion worth of bitcoin now with only little trade. We are taking the future into account.

Bitcoin is not deflationary. Bitcoin is not inflationary. There is no free lunch.

What the f*ck... No offense, but you have no idea what you're talking about.
You have misinterpreted the word "inflation", it seems.
You can read about it here:
http://en.wikipedia.org/wiki/Inflation_rate

[Imahara]

It can't be either deflationary or inflationary by definition. In both cases you are making a price prediction with which you could make a risk free profit if it held true. Whether you have to go long or short, you would in the end trade away the expectation.

Yes, it depends on whether economy is expanding or shrinking. In the first case it will be deflationary, in the second inflationary...

Yes, but then we are talking a movement around some level. Not a constant deflation or inflation.

I suspect the economic cycle in a bitcoin economy will be much less than we are seeing now. A lot of it is caused by the time delay between a central banks guiding indicators (gdp growth/inflation) and the effect of its instruments (money supply change). In aviation it would be called Pilot Induced Oscillation, plenty a crash is caused by that.

[deisik]

The price will incorporate the expected future growth of the underlying economy. Why do you think there is $15 billion worth of bitcoin now with only little trade. We are taking the future into account.

Bitcoin is not deflationary. Bitcoin is not inflationary. There is no free lunch.

If I understood your logic correctly, this price of Bitcoin you're talking about will reflect the expected growth of the underlying economy (more goods for one Bitcoin), thus giving Bitcoin more purchasing power, i.e. bringing about deflation in prices of everything Bitcoin denominated...

[bitcoinminer]

I think it's inflationary as well.

When I first was into BitCoin, people would post 1 picture of a quarter sized bitcoin.

Then, a year ago, you started seeing news articles where they looked more like a half-dollar.

Now, I'm seeing articles where BitCoins are the size of Eisenhower dollars, but twice as thick, and there are usually several in the picture.

So if you look at it that way, the bitcoin really has been inflating.

[deisik]

Yes, but then we are talking a movement around some level. Not a constant deflation or inflation.

I suspect the economic cycle in a bitcoin economy will be much less than we are seeing now. A lot of it is caused by the time delay between a central banks guiding indicators (gdp growth/inflation) and the effect of its instruments (money supply change). In aviation it would be called Pilot Induced Oscillation, plenty a crash is caused by that.

This is called stagnation, i.e. slow or no economic growth...

[Imahara]

What the f*ck... No offense, but you have no idea what you're talking about.
You have misinterpreted the word "inflation", it seems.
You can read about it here:
http://en.wikipedia.org/wiki/Inflation_rate

No offense taken, it is counter intuitive I know.

When you divide production by the fixed number of bitcoin, you are talking about 'production per bitcoin'. Yes, that will keep going up, but it is a completely irrelevant measure. There is NO 1:1 link between production and the supply of currency.

You can not mistake 'production per bitcoin' with 'what a bitcoin buys you'. That is for supply and demand on the market to decide. You can choose to hold on to your bitcoin and spend it later if you think it will buy more then.

[deisik]

When you divide production by the fixed number of bitcoin, you are talking about 'production per bitcoin'. Yes, that will keep going up, but it is a completely irrelevant measure. There is NO 1:1 link between production and the supply of currency.

You can not mistake 'production per bitcoin' with 'what a bitcoin buys you'. That is for supply and demand on the market to decide. You can choose to hold on to your bitcoin and spend it later if you think it will buy more then.

So you will have more goods competing on the market for one Bitcoin which would cause prices in Bitcoin denominated items to go down. If supply increases, prices decrease...

[beetcoin]

so what kind of currency or asset is deflationary by your definition? i can think of nothing.

if the dollar were printed by a fix number, it would be deflationary due to wear and tear or people would lose their paper notes. people will lose their BTC as well. also, BTC is deflationary because people hoard their BTC, which raises the value over time.

[deisik]

so what kind of currency or asset is deflationary by your definition? i can think of nothing.

if the dollar were printed by a fix number, it would be deflationary due to wear and tear or people would lose their paper notes. people will lose their BTC as well. also, BTC is deflationary because people hoard their BTC, which raises the value over time.

Anything backed up by some limited resource is deflationary by nature. Gold backed dollar was deflationary in the late 19th and early 20th century because of huge technological advances back then and impetuous economic growth thereby...

[Imahara]

You keep talking as if in every round of production, you are forced to spend every dollar in existence. You are free to keep it in your pocket. Currency is not just for transactions now, it is also a store of value over time. That is what un-links the currency supply from the production it can buy. What currency buys is for the market to decide, and people thinking about that can take account of the increasing demand for transaction, the wear and tear of bills, etc.

The link in the present economy is artificially kept by the Central Bank adjusting supply to the demands for it. A very imperfect way to steer an economy because it is like driving a car by looking through the rear window.

There is no such thing as a 'deflationary currency', not if you are talking about 'what does this asset buy me'. Only when you are talking about how many there are relative to the trade done with it, but like I said, that is a completely irrelevant measure. It is the source of misunderstanding when people say Bitcoin is deflationary. It isn't.

[DeathAndTaxes]

+1.  In fact Bitcoin is a little inflationary as new coins are constantly being printed. 

It is a little more than a little. 

Bitcoin right now has monetary inflation of >11% annually.  Of course that will decline over time.  It is the future expectation which has caused demand to exceed supply and the price to rise.

[beetcoin]

so what kind of currency or asset is deflationary by your definition? i can think of nothing.

if the dollar were printed by a fix number, it would be deflationary due to wear and tear or people would lose their paper notes. people will lose their BTC as well. also, BTC is deflationary because people hoard their BTC, which raises the value over time.

Anything backed up by some limited resource is deflationary by nature. Gold backed dollar was deflationary in the late 19th and early 20th century because of huge technological advances back then and impetuous economic growth thereby...

bitcoin is limited by resource.. as in the number that will be produced will be limited. it is the same as gold.